More generous wages and holidays ‘could fix UK’s productivity crisis’

But experts warn employers small-scale changes to contracts will not solve the issue

Increasing the minimum wage and statutory holiday pay could help solve the UK’s productivity crisis, a think tank has said, as the latest official figures demonstrated a further slide in output per hour.

A report by the New Economics Foundation (NEF) said raised pay and increased leisure time were closely linked to increased productivity, and called on the government to speed up planned increases in the minimum wage and consider introducing annual increases to statutory holiday entitlement.

It called for the creation of a working-time commission to increase holiday entitlements for workers, and a new mandate for the Low Pay Commission to recommend further sustainable minimum wages rises.

The report said there were “myriad economic and social benefits” associated with reducing the overall amount of time spent working, including improvements to the physical and mental health of workers and the more equitable distribution of working hours to those who were under-employed or unemployed

The NEF also said increasing employee pay would help stimulate greater demand in the economy, potentially boosting growth.

Alfie Stirling, head of economics at the NEF, said: “Raising demand by putting more cash in the pockets of the UK’s poorest workers, while giving people more paid time off from work to spend it, should now be part of a radical mix of options for any government that is serious about increasing productivity in a way that works for people and society.”

Stirling added that attempts to use ‘supply side’ economic policies to improve productivity had not worked, resulting in stagnating wages and living standards

However, Duncan Brown, head of HR consultancy at the Institute for Employment Studies, warned that it was not enough for individual employers to provide more holiday, and said businesses needed to take a more holistic view of how they treated their staff. “At the individual employer level, just giving employees begrudgingly another day’s holiday, and increasing their pay in an unplanned way, is unlikely to result in higher performance,” said Brown.

“These measures need to be linked more widely to how employees are involved and managed, how they are recognised and rewarded, how their skills and careers are developed, and then our evidence is also that this type of reward strategy can realise very significant gains, for the employee and employer.

“Pay and treat your staff well and it will more than pay off for you as an employer.”

Tom Hadley, director of policy and campaigns at the Recruitment & Employment Confederation, said organisations looking to improve productivity, employee wellbeing and employer brand needed to look first at flexible working. “The initial focus for most employers is to start by embedding flexible working practices and finding better ways of measuring performance,” he said.  

“Creating trust and clarity of purpose are the key building blocks for any sustainable changes in working patterns.”

The NEF has also called for a more redistributive welfare system, proposing the creation of a ‘weekly national allowance’ worth £2,500 per year for most adults, and an increase in child benefits, to replace the current personal allowance of income tax. It predicts that this would redistribute £8bn a year from the richest 35 per cent of families. 

The report comes as the latest official statistics have shown a drop in quarterly productivity rates.

The Official for National Statistics UK productivity flash estimate from April to June 2019 found that output per hour fell by 0.6 per cent in Q2 2019, compared with the same period in 2018. This represented the fourth consecutive quarter of declining productivity figures.